A national hardware distributor has agreed to pay $6.25 million to settle claims that it overcharged the government on a General Services Administration Multiple Awards Schedule contract, the Justice Department announced on Thursday.

Fastenal Co. of Winona, Minn., was facing a federal false claims lawsuit for failing to provide the government with the best possible price on a hardware contract first signed with GSA in 2000. The company discontinued the contract in 2005.

GSA’s inspector general had accused Fastenal of failing to provide agency contracting officials with current, accurate and complete information regarding its commercial sales practices, including discounts for nongovernmental customers. To be granted a Multiple Awards Schedule contract, companies must agree to disclose their commercial pricing policies and practices.

“Misrepresentations during contract negotiations undermine the integrity of the government procurement process,” said Tony West, assistant attorney general for the Justice Department’s civil division. “The Justice Department is acting to ensure that government purchasers of commercial products can be certain that they are getting the prices to which they are entitled.”

The investigation was prompted by a 2005-2006 post-award audit by GSA’s inspector general looking into allegations that Fastenal was providing better discounts to its other customers, in violation of the price reduction clause of its GSA contract. The clause requires companies to give the government at least as good of a price as its best commercial customer.

The settlement also resolves allegations that Fastenal improperly assessed delivery and sales tax charges, causing the government to overpay. In addition, prosecutors accused the company of violating the 1979 Trade Agreements Act, which prohibits businesses from selling products to the government that were manufactured in nations without a trade agreement with the United States; in this case, China.

Last July, Justice told Fastenal that it planned to file a federal false claims suit if Fastenal did not pay $9.5 million. The company countered with a $750,000 settlement offer, which the government rejected at the time, according to documents Fastenal filed with the Securities and Exchange Commission in 2010.

“This case is another demonstration of the value of OIG audits in helping to uncover fraud on government programs,” GSA Inspector General Brian Miller said.

Fastenal, which sells a host of hardware, electrical and plumbing supplies, denies the allegations.

“We continue to believe that we complied with our obligation under the GSA contract in all material respects,” the company said in a statement. “However, we felt a continuation of our dispute with the DOJ and GSA was not the best use of our resources.”

The Justice Department secured $3 billion in false claims settlements and judgments from civil lawsuits in fiscal 2010, most often involving companies attempting to defraud the federal government, according to data the Obama administration released last November. The financial recoveries were the second highest in the nation’s history and represented a 25 percent increase from fiscal 2009.

Small business will get greater consideration from regulators who draw up proposed rules.

The Regulatory Flexibility Act already requires agencies to avoid imposing heavy burdens on small companies and search for ways to minimize those burdens. President Barack Obama wants more of that, according to a memo released this morning (Jan. 18, 2011).

Agencies must carry out the regulatory law by allowing small businesses more flexibility in meeting the compliance requirements, he said. They should “take into account the resources available to small entities,” Obama wrote.

For example, Obama directed agency officials to extend the time small businesses have to implement new requirements, such as a new business system.

He wants regulators to consider performance standards rather than meeting detailed design standards. Rules should also simplify reporting and compliance necessities, such as streamlined forms and electronic filing options, the memo states.

The memo also directs agencies to use different standards for small and large companies, or even exempt small companies from particular requirements that larger companies must comply with.

If an agency rule does not have these flexibilities, officials must justify why they aren’t there, the memo states.

“It is especially important for agencies to design regulations in a cost-effective manner consistent with the goals of promoting economic growth, innovation, competitiveness, and job-creation,” the memo states.

The memo aligns with a small-business task force the administration created in April. One of its duties was to clarify policies that are necessary to aiding small businesses in the federal contracting marketplace.

Today, Obama outlined a new overall regulatory strategy to help boost the economy, along with this small-business memo. In it he pushed for more transparency and accountability in regulatory compliance.

Nearly three-quarters (74%) of government contractors surveyed consider the government to be slow and inefficient in resolving contract issues, with 56% believing that the inefficiencies are caused by the Defense Contract Audit Agency (DCAA) and 18% saying it is caused by the contracting officer, according to Grant Thornton LLP’s16th Annual Government Contractor Industry Survey.

“These findings were not unexpected given the changes in DCAA policy adopted in the aftermath of Government Accountability Office (GAO) reports issued in July 2008 and September 2009 that severely criticized the quality of the DCAA’s work,” noted Kerry Hall, Grant Thornton LLP’s Government Contractor practice leader. “The GAO reports and the DCAA changes that followed likely contributed to the survey findings, namely that the process of resolving contract issues is increasingly inefficient.”

More than half (55%) of government contractors reported that their revenue from federal business increased during the past year, while only 22% reported reduced revenue from federal business.

Other highlights of this year’s survey include:

Revenue from the stimulus program — 72% of respondents anticipate no significant revenue growth from the stimulus program over the next 18 months, while the remaining 28% foresee modest growth.

Identifying claims for out-of-scope work — 31% of government contractors consider their procedures for identifying out-of-scope work to be very effective, while 69% see them as being either somewhat effective or not effective. The failure to identify out-of-scope work effectively and seek related compensation may contribute to reduced profit rates.

Bid protests — A total of 22 bid protests were filed during the past year by companies surveyed, and 11 of them were sustained by the GAO or the court hearing the bid protest. This appears to be a higher sustainment rate than has historically been the case and could possibly signal an emerging trend.

The Army has identified more than 4,200 full-time jobs in which contractors are performing either inherently governmental or unauthorized personal services, according to a new watchdog report released on Tuesday.

The Government Accountability Office report, which generally focuses on the Defense Department’s approach to counting service contractor employees and functions, includes previously unreported details on the scope of work being performed by Army contractors.

Since the start of 2009, the Army has completed at least one review of 24 of its 26 commands and headquarters organizations and identified 2,357 contractor employees performing inherently governmental functions, the report said. Examples of inherently governmental activities include awarding and administering contracts, determining budget priorities, and hiring or firing federal employees. Another 1,877 contractors were identified as providing unauthorized personal services that federal employees should be performing. Personal services contracts are contracts that make private sector personnel appear, in effect, as government employees. In both the inherently governmental and unauthorized personal services contracts, the department would typically be required to bring the functions back in-house.

An additional 45,934 Army contractors are performing activities deemed closely associated with inherently governmental functions. These jobs, which include assisting in contract management or evaluating another contractor’s performance, generally are not statutorily prohibited from outsourcing but require strict oversight and management.

Army officials indicated that the reviews help them decide which functions should be performed by military personnel. The GAO report did not provide details on the number of Army positions that have been subsequently insourced, and a Defense spokeswoman did not respond to a request for comment.

Officials at the Army’s Installation Management Command in San Antonio, Texas, told GAO that most insourcing during fiscal 2010 was a result of losing statutory authority to contract for certain security guard functions. They noted that most insourcing in fiscal 2011 will be prompted by budgetary decisions. In August 2010, Defense Secretary Robert Gates announced plans to reduce funding for service support contractors by 10 percent annually from fiscal 2011 to 2013.

Agencies across government are expected to compile an annual inventory to determine the number and type of service contract employees. The Army collected the data on its centralized Contractor Manpower Reporting Application system, which captures information companies report at the contract line item level.

The Air Force and Navy have faced bigger challenges in developing their inventory of service contractor functions. According to the GAO report, the two services have decentralized approaches that rely on their major commands to review the activities of contractors listed in their inventories and report the results to headquarters.

The Air Force completed its initial review in January 2010. But for approximately 40 percent of the contracts, reviews contained inadequate or incomplete responses that could guide a decision to insource those functions, GAO said.

The Air Force Material Command, for example, identified 152 contract actions that potentially involved inherently governmental functions. The official responsible for the command’s review process, however, was unsure of the extent to which these determinations were correct.

The Navy issued guidance to its commands in September, but the results of its initial review were not yet available. The service had previously planned to establish roughly 10,000 civilian positions by fiscal 2015 through insourcing contracted services.

“DoD has acknowledged the need to rebalance its workforce, in part by reducing its reliance on contractors,” GAO said. “To do so, however, the department needs good information on the roles and functions played by contractors, which the department currently does not have.”

Air Force and Navy contracting officials told auditors they rely on processes other than the service contract inventory — such as post-award monitoring — to avoid placing contractors in inherently governmental functions.

According to the Air Force’s fiscal 2010 insourcing plan, the majority of decisions to bring work in-house would be based on analyses of whether the work could be performed more cost-effectively by government employees. Navy officials said their commands review contracts during the pre-award and option phases to prevent the award of contracts that include inherently governmental functions or unauthorized personal services.

The Defense Department reported spending on service contracts leapt from $127 billion in fiscal 2008 to $140 billion in fiscal 2009, although the surge could have been influenced by more thorough and detailed reporting by the military services, according to GAO.

In 2009, Defense officials announced they would cut 33,000 service support contractors departmentwide by 2015. The Pentagon had planned to replace those contractors during the next five years with 39,000 new full-time government employees, many through insourcing.

As of June 30, 2010, more than 16,500 civilian positions were established across the department as a result of insourcing contracted services, Thomas Hessel, a senior analyst in the Office of the Undersecretary of Defense for Personnel and Readiness, toldGovernment Executive in September. More than half of these positions were brought in-house because the work was determined to be inherently governmental, closely associated with inherently governmental, or otherwise exempt from private sector performance, he said.

The Defense Department has halted insourcing at its Pentagon offices and commands because of a fiscal 2011 billet freeze. But the military services are not subject to the freeze, allowing insourcing to continue.

The Internal Revenue Service in recent years has awarded contracts to at least 20 companies with delinquent taxes totaling $5.2 million, according to a new watchdog report.

The Treasury Inspector General for Tax Administration found IRS procurement officials often fail to verify if agency contractors have paid federal corporate and payroll taxes. And, even when officials discover the tax delinquencies, a loophole in federal acquisition law prevents the IRS from terminating the contract, the report said.

“Although IRS contractors are not considered employees, they are conducting business and doing work on behalf of the agency whose mission is to ensure taxpayers meet their tax responsibilities,” Inspector General J. Russell George wrote. “As a result, we believe IRS contractors should be held to the same ethical standards as IRS employees and paid preparers concerning their compliance with the nation’s tax laws.”

The IG reviewed 135 current IRS contactors with awards of at least $250,000 issued between October 2006 and December 2008, and determined that 20 of the firms owed federal taxes. Six of the companies had delinquent tax liabilities totaling $943,000 when they first won the contracts. As of March 2009, the amount the six companies owed had increased to $4.9 million.

In 13 cases, an IRS contracting official conducted a tax check, as required by federal acquisition law. But the reviews shed relatively little light on the significance of the tax liabilities, failing to distinguish the type of taxes owed, the age of the debt, or if the contractors had established a plan to repay the funds.

IRS procurement officials failed to conduct a tax check for the seven other firms. But, it’s unclear whether the checks would have prevented the businesses from winning the awards. Federal guidelines bar the IRS from using tax-indebtedness to exclude a company from obtaining a contract. Regulations permit the agency to verify a bidder’s tax record only at the time of the initial award to determine if the debt could jeopardize the performance of the contract.

Federal acquisition guidelines also do not require the IRS to conduct a tax check when contracts are being considered for renewal, allowing companies to continue receiving federal payments without having to answer for their debt, the IG said. The IRS renewed the contracts of 17 of the 20 companies with delinquencies.

IRS employees, meanwhile, face disciplinary action, including termination, if they fail to file accurate and timely income taxes.

“If the IRS continues to conduct business with contractors that do not comply with the nation’s tax laws, an adverse message will be sent to the American taxpayers as to the fairness of the tax administration system,” George wrote. The problems TIGTA identified are not new in federal contracting. In February 2004, the Government Accountability Office reported that about 27,000 Defense Department contractors owed nearly $3 billion in federal taxes. In June 2005, an audit of 33,000 civilian agency contractors identified $3.3 billion in delinquent federal taxes. And, in March 2006, GAO found that 3,800 General Services Administration contractors owed $1.4 billion in federal taxes.

A 2009 bill that former Rep. Brad Ellsworth, D-Ind., sponsored would have prevented any company with “a seriously delinquent tax debt” from winning a government contract or grant. The legislation cleared the House, but not the Senate.

In January 2010, President Obama issued a governmentwide memorandum directing the IRS commissioner to review the certifications that firms bidding on federal contracts submit to demonstrate they are up-to-date on their taxes. The memo also required the Office of Management and Budget director to issue recommendations on ensuring tax delinquent contractors are not awarded new contracts, and to develop plans to make contractor tax certifications available in a governmentwide procurement database. Those plans have not yet been announced.

The IG recommended the IRS ensure that all required tax checks are conducted before contracts are awarded and that senior agency executives meet and review Obama’s 2010 memorandum. The IRS concurred with those recommendations but disagreed with another IG suggestion that would require an annual tax check on all IRS contractors.

David Grant, chief of agencywide shared services at the IRS, wrote in his response that there is no justification in federal law or regulation for annual tax verifications. “A tax check is cursory,” Grant wrote. “Unverified that is not actionable as the contractor has had no due process in regard to the tax check information and the tax liability has not been finally determined.”